Basic Yield Management For Golf Industry

06th May 2010

Abstract

For more than 20 years, yield management has been an indispensable tool for increasing profits within the highly competitive airline industry. The technique has steadily gained acceptance in other industries that have similar business processes. Although golf operations resemble airline operations in many respects, yield management is rarely practiced in the golf industry. In recent years, new revenue management technologies have emerged that are specifically designed for golf properties. These technologies could have a positive financial impact on the golf industry during the current economic downturn, and potentially represent a new trend in golf course management.

Definition of Yield Management

Yield management is a business term that refers to several methods of maximizing the financial yield on inventory. These methods bring together diverse business practices such as dynamic pricing, market segmentation, and forecasting, with the goal of maximizing revenue through control of inventory levels and pricing.

Yield management is most commonly implemented as a pricing model that optimizes revenue by charging buyers different prices according to the value they place on the purchase. For example, business travelers have a less elastic demand for airline tickets than leisure travelers, and so will pay higher prices for the same ticket. Yield management is also understood as an automated, technologically detailed solution to the age-old problems of what price to ask and which offers to accept. The practice employs technology to sell the right product, to the right customer, at the right time, at the right price.

Other names are roughly synonymous with yield management, including revenue management, pricing and revenue optimization, revenue process optimization, etc. These terms all have slightly different meanings depending on their business application. The term yield management is typically used in the airline industry, and has been adopted by other industries with similar business processes.

Yield Management Components

The elements of yield management differ based on how the concept is applied in different industries. In its primary application within the airline industry, yield management includes the following components:

• Overbooking. This is the practice of accepting more reservations than can actually be accommodated. This is done to balance the increased revenue from full booking against the cost of dropping excess reservations.

• Discount allocation. This is the practice of determining the number of reservations that can be allocated at a reduced rate without the loss of opportunities to sell at a smaller discount or at full price. The ratio of full price to discount varies and is dynamically adjusted based on time to departure, forecasting, past experience, and special events.

 • Traffic management. This is the practice of balancing discount allocation with the complications of multiple routes and connecting flights.

History

Yield management began as a response to deregulation of the airline industry in the early

1980s. Major airlines had to contend with a highly competitive environment that resulted from electronic distribution of inventory, and from the entry of low-cost carriers into the market. Electronic distribution, in the form of GDS (Global Distribution Systems) applications such as Sabre and Apollo, was the main driving force. GDS revolutionized the speed at which inventory could be distributed to buyers, mandating a countervailing force that would enable the seller to organize and control price and availability.

For many airlines during the 1980s, successful implementation of yield management meant the difference between success and failure. By implementing yield management techniques, American Airlines saved $1.4 billion in the period from 1989 to 1992, or about 50% more than its net profit of $892 million during that period. Other airlines, which were not as committed to the new practice, were out of business by this time or soon afterward.

Yield management resulted in benefits not only for sellers, but for buyers as well. While the more innovative airline companies gained increases in turnover and revenue, the traveling public found better access to service through lower prices.

  • Application within Other Industries

    The practice of yield management began to expand beyond the airline industry starting in the early 1990s. Hotels, cruise lines, car rental companies, railways, advertising firms, and others saw value in the technique and implemented versions appropriate to their business. Industries that typically benefit from yield management have the following in common:


* Perishable inventory.
 This refers not just to physical goods, but to any product or service that loses its value if unused by a given date. Examples include empty airline seats, unused rental cars, and unoccupied hotel rooms.

* Variable demand and fixed capacity. This refers to an environment where demand fluctuates, but available capacity does not.

* Advance sales. Inventory is reserved prior to its use. This means that availability and rates can be adjusted based on how early or late a reservation is booked, and based on the volume of reservations over time.

* Multiple pricing structure. Because demand and customer types vary, different pricing structures are used to maximize revenue.

* Very low marginal costs. The cost of selling an additional unit is a small portion of overall costs.

* Price as a powerful lever. Due to low marginal costs, per-unit pricing control is

a powerful tool for increasing operating income. Conversely, inappropriate pricing has a very negative impact.

Slow Acceptance within the Golf Industry
The characteristics that make a business suited to yield management are also common to the golf industry. Tee times are perishable inventory. Courses have a limited capacity and are booked via reservations. Different times and courses have different pricing structures.

There is a negligible cost to booking an additional tee time, and unit pricing can have a dramatic impact on overall revenue.

Although yield management would seem a natural fit for the golf industry, it is rare to find a course today that uses this technique to increase revenue. Part of the reason has been lack of business need; the industry was booming during the 1990s, and resources were directed elsewhere. Today the economic picture is different. Overinvestment in new properties has resulted in a facilities growth rate that exceeds the rate of growth in the number of golfers. Courses are now competing vigorously for a limited pool of players, and are actively searching for ways to stay competitive.

Currently, the main impediment to yield management is the lack of adequate systems automation in the golf industry, combined with a perception that automation serves only lower-level business functions and does not contribute materially to the bottom line. As in the airline industry, yield management is driven by the reservations process. However, many courses still use paper-based tee sheets, and others have only recently begun to replace manual processes with simple, standalone computer systems. Even the more advanced tee sheet systems perform scheduling and reporting tasks only, and do not incorporate methods of integrating yield management rules within the reservation process.

 Potential Application in the Golf Industry
Of the three components of yield management, discount allocation is most applicable to the golf industry. Different rates and availability can apply based on reservation advance

time, location, time of year, time of day, special events, party size, player type, package, etc. to arrive at the fullest and most profitable mix of reservations on the tee sheet.

As with other organizations that are new to yield management, golf operations will face a learning curve in implementing the practice. The ability to forecast demand based on historical patterns is a prerequisite. Customer management is also important. In the airline industry, there continues to be an undercurrent of consumer dissatisfaction due to the perception of price discrimination. For this reason, golf properties should implement yield management not as a radical change in price structure but as a series of intelligent decisions regarding appropriate returns on available inventory.

The complexity of yield management requires not only specialized technology, but also an investment in education, training, customer service, performance measurements, and business process change. To successfully implement yield management, golf properties must be committed at all levels, not just in the area of information technology.

OpenTee: An Emerging Solution
To date, the only system that delivers operational yield management to the golf industry is marketed by Open Course Solutions, a San Diego-based provider of systems automation to the golf and resort industries. Known as Open Tee, this system automates all tee sheet functions, integrates the tee sheet with other business systems, and incorporates yield management tools into the mix. OpenTee’s yield management functionality was developed as a joint project with Walt Disney World in Orlando, and was designed to support that company’s extensive revenue management requirements at five championship courses.

 Discount Allocation
OpenTee addresses discount allocation by allowing management to control authorization of low-price availability. This control is performed at two levels:

* Management level. Management personnel can configure the system to turn availability on and off by course, season, day, time, package, player type, party size, and rate type. These variables provide management with a wide range of options for configuring availability and rates based on past experience, forecasts, and special events.

* Reservation level. During the reservations process, an automated “reservation wizard” applies the rules set up by management. Reservation clerks or customers are guided through a series of screens to arrive at an optimal time and price based on the player type, preferences, and golf package. The rules used by the wizard can be adjusted by management in real time to accommodate unexpected fluctuations in demand.

  • Demand Management Decisions
    Central to yield management are the decisions needed to estimate demand and its characteristics, and to manage that demand using price and capacity control. There are three basic categories of demand management decisions within yield management: structural decisions, price decisions, and quantity decisions.1 OpenTee addresses each category as shown in the table on the following page.

 Other Revenue Management Tools
In OpenTee, yield management is considered a subset of a larger group of revenue management controls that include the following:

*  Volume optimization. This control is designed for business environments in which high-volume selling takes precedence over revenue considerations. Volume optimization is accomplished by:

*  Removing limits to access and availability.

*  Distributing the tee sheet among multiple sales channels, such as a central reservations center, group sales operations, agent/hotel reservation systems, websites, etc.

Creating multiple packages. This has the effect of expanding inventory, which in turn creates increased demand.

 *  Facility optimization. This control is designed to maximize sales to those players or groups who tend to spend more overall at the golf facility. This increases income from fees and amenities such as cart rental, food and beverage, and retail merchandise. Facility optimization is accomplished by:

 Business intelligence modules that gather and report customer data generated by the OpenCourse suite of products, including OpenTee, Micros POS,

Internet Marketing, and others. This data is used as a means of targeting those groups and individuals who contribute most to overall property revenue.

 A group event planner. This module collects information that helps to optimize the return on group play. The collected information includes billing, contracts, payment guarantees, and other event-related information.

 Financial Impact on Course Operations
Yield management can provide the leverage to increase two income sources that are typically underutilized in the golf industry. These income sources include:

Volume. The ability to control availability has a positive impact on capacity.

Absent a concern for displacing higher-paying rounds, operators can partner with wholesalers and other external entities, thereby tapping into new volumes of demand that would otherwise be unavailable.

*  Unit Price. Better control of packages, player types, and rate quotas allow operators to manipulate unit price to the best possible advantage based on demand. Combined with low marginal costs, the ability to quickly adjust unit price can have a dramatic effect on incremental revenue.

 Studies have shown that the consistent application of yield management can increase turnover by 3 to 7 percent. Low marginal costs in the golf industry mean that most of this turnover translates to similar percentage gains in gross revenue.

 Conclusion
People Express was a company that did not survive the airline price wars of the 1980s. Former CEO Donald Burr explained the company’s failure as follows:

“We were a vibrant, profitable company from 1981 to 1985, and then we tipped right over into losing $50 millions a month. We were still the same company. What changed was American’s ability to do widespread Yield Management in every one of our markets. We had been profitable from the day we started until American came at us with Ultimate Super Savers.

That was the end of our run because they were able to underprice us at will and surreptitiously. There was nothing left to defend us.” 2

 Yield Management is a demonstrably critical factor in ensuring the profitability, and sometimes the viability, of any business operating in a highly competitive environment.

 Although golf operations are not as complex as airline operations, the two industries share many similarities. Basic yield management rules, derived from the concept of discount allocation and built into an automated tee sheet, can increase profits for a typical golf course. The technology for implementing yield management in the golf industry is now available and affordable. As the trend toward yield management increases in the golf industry, companies that fail to participate could increasingly find themselves at a competitive disadvantage.

Reference 
1 Talluri & van Ryzin, The Theory and Practice of Revenue Management (Kluwer, 2004). Taken from material found at the Harvard Business School Technology and Operations Management website at http://www.hbs.edu/units/tom/

2 Robert Cross, Revenue Management: Hard-core Tactics for Profit-making and Market Domination (Texere, 1997).